In some industries, employees frequently work additional, unpaid hours that accumulate as a form of leave. This can be added to Xero payroll so that both employer and employee have a transparent method of tracking and monitoring the entitlements for this leave type.
In the Australian version of Xero, accruals for employees leave such as annual leave, personal/carer’s leave, long service leave and family and domestic violence leave are built into the system. Additional leave types, such as Rostered Days Off (RDOs) or Time in Lieu need to be added manually. This article explains the process for settings up this leave type, how to record hours accrued and also how to reduce the balance when this leave type is taken.
Setting up Tracking of Hours Worked Towards RDOs
Pay Item to Track Hours Worked towards RDOs
First you need to set up the pay item that you want to use to track the hours worked that the employees aren’t being paid for, (in the short term at least).
Go to Payroll > Payroll Settings > Pay Items > Earnings > Add > Ordinary Times Earnings.
Fill out the fields like the screen shot below. You want to make sure that your Earnings Name makes it clear that it’s not hours taken for RDOs, as someone new who doesn’t understand a lot about payroll may easily confuse the two. A few things are important here.
- Select Rate per Unit for the Rate Type field
- Type Hours in the Type of Units field and make sure that you don’t type a space after the word.
- Enter 0 (zero) as the Rate per Unit.
- Select the correct expense account for wages. This will vary depending on the Xero organisation.
- You can leave the checkboxes at the bottom empty, as you won’t be using this pay item to process any dollar-value items.
Finally, click the Add button.
Figure 1
Leave Item to Track Number of Hours of RDOs Accrued and Owed to Employee
Now click on Leave in the menu on the left of the screen you’re already on and click Add > Paid Leave. If you’re not sure where we mean, this is accessible from Payroll > > Payroll Settings > Pay Items > Leave > Add > Paid Leave.
Complete the set up as per the screen shot below. A few things are important as follows:
- Select either Rostered Day Off or Time Off in Lieu from the Leave Category drop-down menu. Both will show as ATO Reporting Category Other paid leave (Type O). Rostered Days Off (RDOs) are typically for hours worked towards days off on a regular basis, such as you might find in the construction industry. Time in lieu is typically for ad hoc overtime hours worked that are not being paid but can be taken as extra leave at an unspecified point in the future. From a Single Touch Payroll reporting point of view, it doesn’t matter which one you use. Please note that RDOs are not for staff working part-time who are not rostered to work on specific days of the week. These days off are unpaid and thus are not RDOs.
- Type Time in Lieu in the Leave Name field.
- Enter Hours in the Type of Units field and make sure that you don’t type a space after the word. There is an alternative method you can use to accrue RDOs based on the Normal Entitlement field, but if you want to track RDO hours accurately via the timesheet method that I’m guiding you through here, then it’s best to leave this blank.
- Leave the Exempt from Superannuation Guarantee Contribution checkbox unchecked.
- Unless you choose not to, check the box show the balance of the RDOs on the employees’ payslips.
Figure 2
Set up Employee to Accrue RDOs
Now I need to set up the employees’ pay templates to accrue RDOs. Go to Payroll > Employees and select the relevant employee(s). Now click on the Leave tab and click on Assign Leave Type. Choose Rostered Day Off from the Leave drop-down menu. In the Leave Calculation Method field, select Manually Recorded Rate. If your employee already has an opening balance, enter it here. Where it says On termination used balance is select Paid Out. When you’re done, click the green Save button. A screen shot below shows you what this looks like.
Figure 3
Just one word of caution here. RDOs paid out on termination often form part of an Eligible Termination Payment (ETP), which attracts different tax treatment as well as needing to be reported separately from the rest of the earnings reported on the employee’s Income Statement (formerly known as Payment Summaries or Group Certificates).
In addition, overtime hours treated as Time in Lieu or RDOs may need to be paid out at 1.5x, 2.0x or 2.5x time the employee’s ordinary rate of pay on termination, depending on their employment agreement and/or award. This goes beyond the scope of this article.
Configure Employee Pay Templates
Click on the employee’s Pay Template tab. If you’ve lost where we’re up to, navigate from Payroll > Employee > select the relevant employee > Pay Template. Click on + Add Earnings Line. Select the RDO or Time in Lieu Earnings Rate you created earlier. Select Enter Rate as the Calculation Type. Once the item is showing on the pay template, add an hourly rate of $0.00 then click the Save button in the bottom right-hand corner. Remember I am using this pay item to track hours worked that are not being paid.
Figure 4
Entering Timesheets
Entering timesheets is an optional step. If you don’t use them, you don’t need to follow the instructions in this step.
Now that the set up is complete, you can go ahead and enter your employees’ timesheets. Go to Payroll > Timesheets > Add Timesheet. Select the relevant employee and pay period and click Save.
You will need to enter the hours worked that the employee is being paid for. Select the earnings rate required for each line and add additional lines as needed. Enter ordinary hours, overtime hours and whatever else is being paid on an hourly basis. Then select the hourly rate you created earlier, which I called Hours Worked Towards RDOs. Enter the amount of hours that the employee worked towards their RDOs but is not getting paid for and needs to contribute to their RDO balance.
When you’re done, click the green Approve button. You can revert back to a draft if you need to correct anything. Another option that you have is that you can save it as a template to use again next pay period. This will make it quicker next time around and you will only need to enter the variations.
See the screen shot example below. I have used a scenario of an employee, James Lebron, being paid on a weekly pay cycle. He’s working a 40-hour week but is being paid for 38 hours and the remaining 2 unpaid hours are being added to his RDO balance.
Figure 5
Entering a Pay Run
So now I am ready to enter a pay run using the timesheet data entered earlier. Go to Payroll > Pay employees > Add Pay Run and select the relevant pay period and click the green Next button. Let’s click into James’ pay to see what’s happening. As there is a lot of information in the pay run that I don’t need to look at for this example, I’ve only pasted two screen shots showing the top and bottom sections of the pay run.
The first screen shot shows the hours that the pay run has pulled from the timesheet. Notice how the Hours worked towards RDOs shows the 2 hours, but at a $0 hourly rate. You’ll also notice that the hours are locked. You can’t edit them from this view. If you’ve made a mistake, you’ll need to unlock the timesheet and make the corrections there.
Figure 6
The second screenshot shows the leave accrual section of the pay run for James. The RDO leave type has a blank field. You need to enter the number of hours from the top section of the pay run into this section at the bottom. This example shows two hours for the week. Remember to save the changes you’ve made to the employee’s pay and post the pay run.
Figure 7
Now click here to have a look at the payslip to see what the employee sees.
The reason why I use this method of entering the hours into a timesheet first is so that the payroll administrator is less likely to make errors. By entering the timesheets a day at a time and making sure that the total number of hours match for each day and each week, and that the hours are correctly allocated to each pay item, accuracy is increased. It’s easy to get confused when you’ve got a lot of different pay items and you’re relying on your brain power. If you’re having a bad day or working late at night, errors are just too easy to make.
Taking RDOs
Putting in a Leave Request for RDOs
So now I need to look at how to process a day off and an employee using up some of their RDO hours. You’ll need to create an application for leave. As the RDO is effectively being treated as a leave type in Xero, I need to follow the same process as I would if the employee was taking annual leave or personal/carer’s leave. There are a couple of different screens that you can enter this from, but it doesn’t matter which one you choose. Here are your options.
- Payroll > Leave > New Leave Request
- Payroll > Employees > [Employee Name] > Leave > New Leave Request
You’ll then need to select the employee (if using option 1), leave type taken, description, start and end dates and confirm the total hours. The screenshot below shows you what this step looks like. You’ll notice that the number of RDO hours currently available shows up here. You can then decide whether or not to let an employee have a negative RDO balance after you’ve entered the leave request. Approve the RDO leave hours.
Figure 8
Entering Timesheets for a Week Including an RDO
When you enter the timesheets for the week that the employee is taking an RDO, enter only the hours worked. In this example, I’ve entered four days at eight hours each for James. In this example, he has not worked extra hours towards RDOs in the week he took an RDO. The fourth day of 7.6 hours will get added via the approved leave application when you enter the pay run. Let’s have a look at a pay run now, broken down into the top and bottom sections again across two screenshots.
Figure 9
Entering a Pay Run that Includes a Week with an RDO
You can see in the first screen shot that the hours are locked again. The pay run has drawn the ordinary hours from the timesheet and the RDO from the approved leave application. If you compare it to the screen shot earlier, you’ll see that the dollar value is exactly the same, as we’re still paying 38 hours.
Figure 10
In the second screen shot you’ll see that the hours accrued for RDOs are only 1.6 hours this pay cycle. This is because the employee only worked on four days. Four x 0.4 hours = 1.6 hours. Remember that this part of the pay run only shows hours accrued, not hours used, or taken. You’ll see the reduction in the total RDO leave balance on the pay slip.
Figure 11
Pay Slip Showing RDOs Taken
The PDF here shows what the pay slip looks like to the employee on a week we’re they’ve taken an RDO. The bottom section shows that 7.6 hours of leave have been taken and that the employee has a balance of 2.0 RDO hours remaining. James started with 8 accrued hours. I subtracted 7.6 hours for the day he had off and in the same week he accrued another 1.6 hours, leaving him with a total of 2 hours.